It would be an understatement to say that millennials walked away from the financial crisis feeling more debt averse.
They’ve practically shunned credit cards. They loathe student loan debt, to the point where some students are refusing to take out any loans at all. They are taking longer than previous generations to move out on their own and buy houses.
The lesson for many has been to keep debt as low as possible. Yet, sometimes it’s the people with the least student loan debt who have the hardest time paying off their loans, according to a new report released by the Federal Reserve Bank of New York.
As the chart below shows, 34 percent of the people who graduated in 2009 with less than $5,000 in student loans defaulted early on their debt. That was almost double the 18 percent default rate among those with more than $100,000 in student loans.
About a fifth of the students who left school that year had less than $5,000 in loans. A bigger share, 29 percent, of those who graduated that year had student loan balances of $10,000 to $25,000, and their average default rates were just under 25 percent. Only 3 percent of students left with more than $100,000 in debt.
Study after study shows that there is a payoff for going to college. People with degrees earn more money than those without them. They generally have a better time landing jobs. Ideally, those jobs will put them in a better position to pay off any student loans they took out to pay for those degrees.
But researchers say the outcome may have been different for the people with the smallest loan balances. The study didn’t look at graduation rates, instead grouping people based on the last year for which they took out student loans.
It’s possible that some of these people had balances on the low end because they didn’t graduate, which would leave them with some of the debt and none of the benefits that would help them to pay those loans off, researchers note. Some of the people who did graduate from their programs may have earned credentials that were less expensive than the typical four-year degree, but also had less payoff.
As The Washington Post has reported, many low-income students who get into college never graduate because they struggle to get enough financial aid to cover tuition and can’t afford to pay for books and equipment. Often, those who do graduate, take longer — up to six years — to do so.
The NY Fed also found that many students default on loans several years after they leave school, and not just during the first three years, which is the metric that gets the most attention.
What do you think? What else could be causing people with smaller loan balances to struggle to pay off their debt?